Eli Lilly: A Bargain in Disguise—Statistical Proof Revealed

Understanding Unusual Options Activity and Its Implications

Unusual options activity can be a double-edged sword for investors. While it may offer insights into potential market moves, it's important to recognize that nothing is ever straightforward on Wall Street. The challenge lies in interpreting this data effectively without falling into the trap of overreliance on signals that may not always hold true.

If unusual options activity were inherently predictive, every investor would be trading based on that information. However, if that were the case, any opportunities would quickly be arbitraged away, creating a self-defeating cycle. This paradox means that while unusual options activity can provide valuable clues, it should never be viewed as a guaranteed path to success.

Despite these challenges, certain stocks may still present compelling opportunities. One such example is Eli Lilly (LLY), a pharmaceutical giant that has recently attracted attention due to its unusual options activity.

Why Eli Lilly (LLY) Might Be Worth Watching

At first glance, LLY stock doesn’t seem like an obvious choice for speculation. Since the start of the year, Eli Lilly has underperformed the broader market, losing 2% compared to the S&P 500's nearly 12% gain. Additionally, the DISCOVER TRENDS Technical Opinion indicator rates LLY as a 72% Strong Sell, suggesting a weakening short-term outlook.

However, the latest options activity might warrant further investigation. On the surface, last Friday’s total options volume of 45,716 contracts wasn't particularly remarkable, as it represented a 47% decline from the trailing one-month average. But the options flow — which focuses on large block transactions likely placed by institutional investors — tells a different story.

Net trade sentiment stood at $2.044 million above parity, favoring the bulls. The most intriguing aspect was the largest trade by dollar volume, which involved nearly $2.7 million worth of bought $500 calls expiring March 20, 2026. This suggests a potential push toward the psychologically significant $800 level by expiration, which could indicate a bullish trend.

Historical Patterns and Market Behavior

Past price behaviors suggest that LLY might be poised for sustained growth. In the past 10 weeks, the market has shown a buying bias six times and a selling bias four times, yet the overall trajectory has been downward. This 6-4-D sequence historically represents a sentiment reversal, with past analogs indicating an upward drift over the next 10 weeks.

According to the data, there is approximately a 70% chance of upside 10 weeks following the flashing of the 6-4-D sequence. However, it's crucial to note that this statistical information is based on in-sample data. To better understand the probability of causality for the 6-4-D sequence, out-of-sample tests are necessary.

Out-of-Sample Tests and Market Conditions

Conducting out-of-sample tests on LLY stock revealed that the 6-4-D sequence sparked a clear upside bias in more recent time periods, such as the 2010s decade and the post-pandemic period between 2022 and 2024. The 2000s decade, however, was an outlier due to heightened market volatility during the Great Recession.

From the fifth week onward, both positive and negative pathways associated with the 6-4-D sequence showed higher tilt, reinforcing the idea that the sequence is a strong indicator of future performance.

Strategic Trading Opportunities

Based on the market intelligence gathered, one of the most tempting trades is the 780/790 bull call spread expiring Oct. 17. This strategy involves buying the $780 call and simultaneously selling the $790 call, resulting in a net debit paid of $455. If LLY stock rises through the second-leg strike price ($790) at expiration, the maximum profit is $545, a payout of nearly 120%.

Breakeven sits at $784.55, which is 3.86% above Friday’s close of $755.39. While this trade may seem ambitious, it is considered rational and realistic given the current market conditions and the historical performance of the 6-4-D sequence.

Final Thoughts

In conclusion, while unusual options activity is not a guaranteed predictor of market movements, it can provide valuable insights when analyzed correctly. For investors considering Eli Lilly (LLY), the combination of technical indicators, historical patterns, and recent options activity suggests a potential for a bullish reversal. As always, thorough research and careful consideration are essential before making any investment decisions.